I Took 20 Peking University Students to Lunch with Warren Buffett (Again). Here’s What Happened. (Pt 4 of 4)

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This is the final article about our trip to Omaha with 20 Peking University students. In Part 1, I went through our morning visit to the Nebraska Furniture Mart. In Part 2, I detailed the Q&A and lunch with Warren Buffett. In Part 3, we went to Borsheim’s Jewelry (another Berkshire company). And then it was off to Oriental Trading Company, my favorite of the companies.

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Final stop: Oriental Trading Company

Oriental Trading Company (OTC) is a unique B2B print catalog turned e-commerce company. I am fascinated by this company. They sell a very wide assortment of unusual items, like rubber ducks, customized t-shirts, balloons, and streamers. And their core business has historically been as a party store for schools and other businesses. This has expanded to the consumer side but they have typically been the place a school teacher or hospital secretary went when they needed 100 streamers, 50 balloons and a whole bunch of other random small fun things for a party or conference.

This company can be a bit confusing so it helps to know the background.

  • Founded in 1932 in Omaha by a Japanese immigrant, OTC was mostly a gift shop with imported merchandise. And it was family-owned and operated for most of its existence.
  • In 1956, they moved into print catalogs where you could order lots of random items. And they focused mostly on selling wholesale to businesses.
  • In 1986, they started selling more to schools, hospitals and businesses
  • Today, the company handles 40,000 SKUS in +50 categories with 4 fulfillment centers. Print catalogs used to drive fulfillment through the webpage (90% of orders). But this is being driven more and more purely online now.
  • Their biggest selling categories are party supplies (#1), toys and novelties (#2), crafts, school supplies (#4), and weddings.
  • The average price per item is $8, far below what you would see on Amazon. Although the average order size is $75.

So OTC is a specialized business for assembling assortments of small, low cost unusual and fun items. They have customized in both ordering and fulfilment to serve this unique need.

Berkshire Hathaway got involved in 2012, after the company emerged from bankruptcy. Their financial problems had mostly started in 2006 when the Carlyle Group bought the company using a lot of debt. While the company had long been profitable, this was right before the financial crisis and the company eventually went into receivership.

After coming out of bankruptcy, the CEO sent an email to Warren Buffett on a Friday at around 10am, asking if he was interested in buying. He got a call from Buffett directly about two hours later. They had a basic deal within a few days and the whole thing was closed within 45 days.

Now a Berkshire company, OTC began to use its cash for things other than paying down debt. They have done several acquisitions in recent years. These include Fun Express, Mindware (games and puzzles) and SmileMakers (mostly stickers for companies like hospitals). And while these deals are very small for Berkshire, Warren was involved in each of them directly. OTC has also launched new internal brands such as Learn 65, MarryMe and Fun365.

Does OTC have a competitive advantage?

If Berkshire buys a company outright, I assume it has a competitive advantage and try to figure out what it is. However, OTC’s advantage is not totally clear to me. Like NFM and Borsheim’s, OTC has long dominated a circumscribed, niche market. But…

  • NFM’s market is circumscribed by geography and the cost of moving (and storing) furniture.
  • Borsheim’s was circumscribed by geography and the need to see, touch and feel expensive jewelry (fading).
  • But OTC’s market is circumscribed more by its unique order-type. It is their ability to fulfill these orders (lots of unusual, low-cost items custom assembled) more efficiently and cheaply than a company like Amazon that makes them different.

And having a circumscribed market is critical. If your advantage is based on being larger than a competitor (selection, price, etc.), then you need a limited market without room for your competitor to grow to your size. You want local dominance of a circumscribed market.

According to the OTC CEO, the “lynchpin is fulfilment”. I think it is the fixed cost that matters. And I think the key number to know would be the % of fulfillment cost for a typical order (a fixed cost divided by their big volume in this space). I think given their higher volume in this unique, circumscribed market (plus their specially designed facility), they are the low cost provider for these types of orders. But I haven’t seen their numbers so I’m just guessing.

OTC’s business appears to depend on three big assets:

  • An installed customer base of customers and businesses that make these types of unusual orders. They have big volume in a small, strange market with unique needs (a great strategy).
  • An ordering system that allows users to find, discover and assemble from a wide spectrum of fun items – that do change frequently with tastes. Ducks are very popular in general. But spinners are the most popular item this year. They originally accomplished this via print catalogs. Now it is more through an online portal.
  • A fulfillment center designed for assembling these types of orders. They handle about 6-7M orders per year.

After the management presentation, we took a tour of their La Vista fulfillment center (no photos allowed). It mostly handles party supplies, arts and crafts, toys and novelties. They handled 67M units in 2017, with 400-500 employees working 3 shifts / 5 days per week. It has 500,000 square feet of storage and 250,000 square feet for fulfilment. They say they could host 12 simultaneous football games in the facility.

***

A final thought.

All three of these Berkshire companies have roughly the same approach. They are all service businesses that dominate niche markets. And each of these niche markets have unusual purchasing / customer characteristics and operating requirements with significant fixed costs. So as long as you manage your small world well and keep your costs low, you don’t really give a competitor any space to enter and get to your scale.

Late night walk across the Missouri River

So that was our day. The trip was already showing up all over Chinese social media. The students went off to eat and then hosted their own live stream with Sina.com a few hours later.

I went down to the bar and had a drink to celebrate. I had put my students at the same table as Warren Buffett. I had done my duty as a teacher for that week.

And then in one of my stupider moves, I thought it would be nice to walk back to my hotel via the footbridge over the Missouri river. I was almost completely frozen by the time I got back. It turns out the wind chill gets really bad on bridges over rivers. Everyone but me probably already knew that.

The next morning I was up at 4am for a flight to Brazil. I have a five city speaking tour set up and Brazil is one of my favorite places. I’m writing this on the plane and we are just about to land in Rio de Janeiro. Going to be awesome.

Thanks for reading, -jeff

That’s it for Part 4. If you missed it, Part 1 is here, Part 2 is here and Part 3 is here.

A special thanks to the incomparable Shujun Ma, Robert Bao and everyone at the Peking University International and External Relations Department for making this all happen. This was a team project. I just happen to be the one who blogs.

——

I write, speak and consult about digital strategy and transformation.

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